Equipment Finance Melbourne: Definition, Perks and Disadvantages
Equipment Finance Overview
Most businesses need equipment in order to operate or even to exist. The type of business and the kind of equipment you need are the key factors that determine whether to buy or seek financing. Equipment financing helps all types and sizes of Australian businesses obtain the machinery, vehicles, or other equipment they need to conduct their operations.
Equipment finance helps businesses that are finding it hard to access other forms of financing since the equipment acts as security and may be taken away if the business is unable to pay. As such, lenders do not exceed the value of the equipment when offering businesses equipment finance. Also, the length of the loan does not exceed the economic useful life of the equipment.
Equipment finance helps all types of businesses, but more so small businesses and startups that may not be able to get financing through the traditional funding methods. Equipment can be financed in virtually every sector of industry such as manufacturing and mining equipment, vessels and containers, IT equipment and software, agricultural equipment, construction equipment, office equipment, among others.
Benefits of Equipment Financing
1. No down payment
Unlike most traditional forms of financing, equipment financing makes it possible for businesses to get 100 percent financing without any down payment. This is key especially for firms who don’t have cash but need equipment to function.
2. Helps Businesses Maintain Cash
Since you are not required to pay anything when getting the equipment finance, businesses are able to hold on to their cash, or working capital, which can be used to fund other areas of the business such as paying for overhead expenses, expansion, marketing, or improvements.
3. Hedge against Inflation
Equipment financing provides a hedge against inflation because instead of paying the full cost up front in today’s dollars, the interval payments delay your outlay of funds. In addition, you get to pay for the equipment at the price and rates that were locked in at the date of closing. The financing company absorbs any devaluation of the payments as a result of inflation and other financial risks.
4. Keep up with the latest technology
Technology is ever evolving. What seemed amazing yesterday is replaced with something better today, which is then replaced with something even better the next day. To stay ahead of the competition, businesses need to invest in the latest technology which may not be possible without financing. Equipment finance provides a way for businesses to get the latest equipment as soon as it is available.
5. Leverage equipment expertise
Since you don’t really own the equipment until you have fully paid for it, the equipment financier may provide asset management services to help track the status of the equipment. They may also provide services like installation, maintenance, and de-installation of the equipment.
In some cases, the equipment financing company may help businesses dispose of their equipment making it faster, easier, and less likely to attract penalties as a result of improper disposal.
Disadvantages of Equipment Finance
1. Restricted Use
When you buy equipment using equipment financing, you don’t own the equipment until you have paid fully for it, which can take years. You have to get into an equipment financing agreement which may restrict utilisation of the equipment. You are also not allowed to make any modifications without seeking permission from the financier.
2. Higher Cost
The cost of equipment financing is much higher than the cost of buying the equipment in cash.
3. Equipment can be taken away
Failure to pay as per the agreed terms under the contract may result in repossession of the assets by the financier.
Interest and charges
On average, equipment finance rates in Australia 5-6% depending on the type of equipment and the time period.
Alternative forms of financing
There are other options for businesses looking for ways to get financing to buy equipment. Some of them include:
1. Bank Debt – A traditional bank loan impacts your available credit and may dip into your cash reserves. Also, most banks do not offer 100% financing.
2. Chattel Mortgage – this provides businesses with immediate ownership of the financed equipment.
3. Using Angel Investors – investors bring in their money in exchange for shares in the business or a slice of the company’s profits.
The following are some of the companies offering equipment financing in Australia:
- Heavy Vehicle Finance
- LeaseCorp Finance